- Present Value Of Annuity:
- What is Present Value Annuity?
- The present value of an annuity is the current value of a stream of equal payments. That is made at regular intervals over a particular period of time.
- Importance of Present Value Annuity
- The present value of an annuity is the sum of the periodic payments. Each of them is discounted at the given rate of interest to reflect the time value of the currency. Higher the rate of discount, the lower will be the present value of the annuity.
P = A x ((1 - (1 / (1 + r) ^ n)) / r)
- P = the present value of an annuity stream
- A = the dollar amount of each annuity pay
- r = the interest rate (or the discount rate)
- n = the number of periods (time when payments will be made)
Suppose a person has an opportunity to receive an annuity that pays $50,000 per year. For the next 25 years, with an interest rate of 6% or a lump sum payment of $650,000. Therefore, using the above formula:-
Present value of annuity;
- = $50,000 x ((1 - (1 / (1 + 0.06) ^ 25)) / 0.06)
- = $639,168
- May 18, 2018
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